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Sunday, June 17, 2012

Misfits of Economics & State Assets

The selling off of state assets debate is
probably about to go viral as the Mixed Ownership Model passed its second
reading. The realisation has hit home that the government is in a position to
pass bogus law notwithstanding public opinion on the matter. The issue appears
to be black and white, either sell them (right) or keep them (left). However,
many New Zealander's hold unfounded views that the sale of state assets is good
for the economy either because they do not understand what the sale of state assets
will mean or because they have been persuaded by an over enthusiastic right
winged peer that selling state assets is good for the economy because John Key
said so. Let’s have a look at the model and its associated flaws.

The Mixed-Ownership Model (MOM)

This model is designed to ensure that the
Government retains a 51% share of each of the assets it intends to sell. That
means that 49% of each company is up for grabs. The model is intended to
provide 'mum and dad investors' the opportunity to invest in highly profitable
companies that they might not have otherwise had the opportunity to do.
However, the most a single shareholder can purchase is 10% in each company.
This 10% cap protects each company from obtaining another controlling interest
in the company, and pre-emptively safeguards against overzealous foreign
investment.

Problem with 'mum and dad' investors
Firstly, mum and dad investors (small business)
are rapidly becoming the working poor, so the likelihood of them being able to
purchase those shares is slim to none.

Secondly, even if mum and dad make an offer, one
that is in their price range, the Government will not sell if it does not meet
their baseline. This back out clause is reassuring for those who oppose asset
sales, however, it is somewhat a game changer for those potential 'mum and dad'
investors who voted in the Government on the basis that the opportunity to
invest was within reach. Game changer might be a bit strong, but the marketing
was then certainly misleading.

Problem with foreign investment
There is nothing in the MOM that prevents
investors from on selling to foreign investors. Now, I am not opposed to
foreign investment in NZ provided investment is regulated and does not
adversely affect the public.

In the context of the MOM, this essentially means
that wealthy New Zealanders that can afford to buy shares in the state assets
can buy the shares at a bargain price (remembering that the government has
already expressed that they will sell below market value). They can then sell those
shares for a profit to the highest bidder. Usually this will be a foreign
investor. Now, if all shareholders sold their 10% to foreign interests, it
simply means that the government would retain 51%, and the remaining 49% could
be owned by foreigners. The impact on society here, is that as the government
is the majority shareholder, must protect the interests of its shareholders and
not the interests of the public. In order to create profits it could result in
higher energy prices, fewer jobs for New Zealanders, and profits that would
otherwise have returned to the domestic economy by retaining the assets will
now go offshore into the pockets of foreign investors.

The short term injection of capital from the
initial sale of shares will be spent to fund non-profitable infrastructure
projects. Nonsense.

Problem for the taxpayer
Why the austerity measures in this year’s budget?
Simple answer - to fund the tax cuts for the rich. This is not an attack on
those who receive the benefit of National's tax cut policy, but to point out
that NZ simply cannot afford them. This is obvious from the mere fact that the
government has undertaken austerity measures, which means, no new spending. So
in order to fund infrastructure projects on an austerity budget, National's
answer is not to retract the tax cut policy to spread the wealth and invest in
infrastructure while retaining highly profitable assets. No. Instead these
misfits of economics insist on retaining the unaffordable tax cuts, selling off
profitable state assets and making them available for purchase by those who
already receive the benefit of the tax cuts enabling them the privilege of
investing in highly profitable companies below market value with the future
option to sell for a profit.

The MOM will be passed at its third reading by a one seat majority. Whatever
happened to democracy? The mandate relied on is a fallacy which I have
discussed in a previous post. Additionally, Act and United Future both
campaigned on a deliberation with the public in respect of the MOM, so the bare
majority that National and right wing commentators are calling a mandate is
flawed.

National Party say less debt and more investment through the MOM. This is misleading. Whilst the government may not be borrowing more, the sale of state assets is not going to reduce debt in New Zealand and will instead cost the government more than its willing to publicly admit.

UPDATE:Government plans to spend up to $400m more on asset sales
The time has come for the National Government to be up front about the cost of providing a so-called 'loyalty bonus' to purchasers of shares in its asset sales programme, Green Party Co-leader Russel Norman said today.

On Q+A this morning, Tony Ryall joined John Key in expressing support for a loyalty scheme, such as the 1 for 15 bonus share that was offered to retail shareholders in Queensland Rail National who held their shares for two years, but would not offer any information on how much it would cost.

On a $6 billion sales programme, a 1 for 15 share bonus would cost the Government up to $400m. This would be on top of the $120m that the Government has indicated it expects to spend on middleman such as investment bankers and advertising companies, and the $100m annual increase to the Government's deficit due to foregone profits.

"It is ludicrous that the Government is just a couple of months away from selling the first of our energy companies yet it still won't tell the public how much it would cost", said Dr Norman.

"Either they are trying to hide the truth from New Zealanders or, just as worryingly, they don't know themselves...it is becoming clear that there are huge undisclosed costs that further undercut the economic case for asset sales...a loyalty scheme could cost as much as $400m, on top of sales costs that the Government conservatively estimates at $120m. That's half a billion dollars spent on selling assets that Kiwis want to keep!...Additionally, Budget 2012 shows the net loss of profits cutting a $100m a year hole in the Government's books. The plain truth is that asset sales don't make sense for New Zealand. That's why the vast majority of New Zealanders want the Government to drop this ideologically-driven policy," said Dr Norman

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The views expressed are my personal views. Some views will be well researched while others will be reactionary. Where appropriate I will provide references to material. Prone to inconsistencies over time. Feel free to hit me up about it.